Estonian Economy and Monetary Policy 3/2018

A lot of countries have had to adapt to expanding trade barriers since spring of this year, though these have not damaged the growth in global trade, at least not yet. Growth slowed a little in the summer months in the global economy as a whole, but this was partly caused by the typical cooling of the economic cycle. Although growth has eased a little, demand still increased in foreign markets, which was reflected in the Estonian economy as export revenues from goods and services increased substantially.

Revisions to the economic statistics recently released by Statistics Estonia confirm what was suspected, that the Estonian economy did not start growing sharply in 2017 but was already doing so earlier. This is more in line with the deepening shortage of labour, which has been a cause of concern for companies for a long time. Unfortunately the state of the labour market reflects not only the expansion of the economy, but also the lack of interest from companies in increasing productivity and in investment. This is particularly noticeable in branches of the economy with lower productivity, where available labour resources have become fewer, but this has not led to any increase in investment. Such a pattern could earlier be explained by uncertainty about the future, but now the main reason is probably that there is less future for types of production using outdated or obsolete technology, while there are difficulties in moving over to new technology. Branches of the economy with high productivity invest more and this attracts resources, including the reallocation of labour. However, the total purchases of fixed assets by the whole business sector are so small despite good funding conditions that they indicate bottlenecks that need to be resolved in the business environment.

The lack of investment by businesses and the higher savings rate of households means the current account has remained in surplus and Estonia is a net lender to the rest of the world. The income level of Estonia is still below the average for the European Union, so it might be expected that loans might be taken to finance investment so as to achieve faster growth and a higher income level. Instead, stresses have built up in the labour market. The unemployment rate has fallen to one of the lowest levels ever recorded and wage growth does not show significant signs of slowing. Given that some of the unemployed are those who entered the labour market under the Work Ability Reform and have not yet found work, the number of unemployed would have been even lower without the reform. The exceptionally low level of unemployment illustrates well the cyclical peak the Estonian economy has reached. It also indicates that the current rate of growth in the economy is not built on a stable foundation, and some decline in growth may be expected.